'Great' Investment Ideas Sometimes Illegal

Every so often I'll receive an email from an assertive investor who has purchased a house and started running their own real estate investment business. Recently one such emailer received a letter from a county or city agency telling them to cease and desist their activity. The letter was directed to me for a sympathetic ear.

Below are some ideas that novice investors may think they can carry out, but need to be careful that they are not violating a local law or even fair housing.

Idea No. 1

Creating a multiple family housing unit out of a single-family house. When you see a house advertised with a nanny or in-law suite, be careful that the current homeowner hasn't just violated local building codes by installing a kitchen in the basement to allow the nanny complete independence from the family during off hours.

Installing a kitchen in many jurisdictions constitutes a separate living quarters and it may violate local occupancy restrictions. If your investment property is in a single-family dwelling zoned area, then it must be only for one family. Having space for another separate "family" or entity to live in may be illegal.

If the local housing inspectors find out (and they have their ways) you could end up having to yank out the kitchen just to ensure the house will remain a single family dwelling -- thus losing your ability to have two rental incomes from one property. Which brings us to …

Idea No. 2

Multiple renters in one house. Some investors have been able to increase the usual total dollar rental income by having several sets of renters in the same house. In college towns, for instance, the house may be rented out one room at a time instead of as one rental unit. If the local laws allow it and you're willing to have the threat of frat parties in your home, this is a pretty good way to increase your total rental income in a property.

While the going rent for the house in a college town may be only $1,200 per month for the whole house, if you could get $500 per month for each room instead, you might double or triple the going rental income for your investment.

The problem with this method is that you may be facing issues with local ordinances limiting your total rental income from the house. A type of rent control, this limitation has several purposes, depending which side of the legislation you stand. It could be used to discourage carving up a house for student rental, thus preserving the nature of a single family dwelling community. It also encourages investors to rent out to more stable renters than students, thus reducing problems with parking issues, neighborhood turnover, etc.

Idea No. 3

Renting to people just like me. Many people want to jump into the investment game but can't swallow the hard cold fact that they must rent their house out to anyone who can qualify to rent the property. The fear of renting to say, a nonwhite renter or a non-Christian or a non-heterosexual, just scares many investors. The investors says he doesn't believe they're bad people, he just doesn't want to handle the difference in lifestyle or culture that may invade their investment.

So they'll try to rent exclusively to people who attend their house of worship or to a certain age bracket or advertise only in limited media to ensure only the "right" people call them to rent. These are veiled attempts of housing discrimination no matter how you carve it up. If you want to invest, then buy in to the fact that housing is available to anyone who can afford it.

As you move forward in the investment game, be sure you understand and are willing to comply with local, state and federal laws regarding rental properties. It could make the difference of having a gain or loss in your investment.

Published: April 7, 2006

Who Makes More, You or Your House?

Last year my house increased in value by $95,000, according to my local tax assessment. The joke in the Washington, D.C. area is that your house could make more than you do in a year. When it comes to the annual tax bill increase, however, it's not very funny.

Fairfax County, VA (yes, home to the Final Four surprise George Mason University Patriots basketball team), is a tough location in which to purchase and maintain property, especially when it comes to the real estate tax rosters. The county has enjoyed several years of huge jumps in tax assessments, meaning tax income, and have only just recently reduced the tax rate by 13-cents last year. Thus, my tax bill only goes up $950 this year (that would be $79.16 per month on my mortgage payment.)

Now, while the Board of Supervisors would contend -- "well, it's ONLY $79 per month," I contend it's been increasing that way for several years. I am now paying $2,785.95 more per year on my tax bill than I was five years ago. But I digress.

This column is about how you can access your tax records (and your neighbor's) to keep up with information about your property (at least from the county/city's perspective) about such issues as your tax bill, home size, etc.

A few years ago, the best website to search tax assessments from around the country was maintained by a grad student at the University of Virginia in Charlottesville, Va. Apparently, soon after I printed that a few years ago, the grad student graduated and the site went stale and is now off the Internet radar.

However, a plethora of sites have arisen in its place. First check with your county/city to see if they have placed the records online. Then look elsewhere. Many commercial records sites require membership and a fee, but most are free for limited information and then a fee for more details. Searching through the main search engines returns upwards to 50 million sites for "property tax records." Your best bet in narrowing the search is to simply enter your county and city name in the search as well.

For small towns and counties, you may still have to research your tax records the old fashioned way -- go to the courthouse and look them up. But for a growing number of jurisdictions, the process of digitizing the records is becoming so affordable, that it appears soon most jurisdictions will have the records online.

If your records are available online, pull them up as soon as possible. Next to your credit report, this is another piece of information every homeowner should look over at least once a year, primarily, to make sure the tax assessor got it right. I have seen some tax records with such erroneous information, that the homeowner could protest the record and get thousands of dollars back from the jurisdiction. (The process of appealing your record is determined by every jurisdiction's rules and regs, of course, but don't let the records come in and sit there -- look them up and find out if your house actually matches the county's description.)

Another good thing about the tax records is to check up on a home seller marketing the property. Sometimes, the agent/owner may get a little "positive" about the property. A "bedroom" may actually be an office/den/bonus room if it doesn't have a regulation egress. The lot they're touting as a third acre(.33), may actually be just a little larger than a quarter acre (.25). While it may not sound like much, the .08 difference, makes up about a third more land, which could affect the price.

When you're looking at a house that has an addition or finished basement, if the tax record doesn't reflect those changes, you may have an addition and finished basement that was installed without permits -- and that means without building and safety inspections.
Get to know your tax record and you'll get to know your house even better.

Published: March 31, 2006

Ways You Can Lose Your Property

There are times and ways that people lose their homes through foreclosure or possession. The way many rags-to-riches seekers pursue the quick buck is through the foreclosure sales. Nevertheless, there are several other ways homeowners or investors can lose property. Below are at least six ways a homeowner can lose their property to the auction block.

Don't pay your mortgage. Generally, quit paying your mortgage and you'll end up getting past due notices, followed by foreclosure proceedings notices and then a visit from the sheriff's office to "assist" you in removing all your property from the household.

While there may appear to be a lot of foreclosures out there, the Mortgage Bankers Association reports that less than 1 percent of mortgages in 2005 went into foreclosure (down 12 basis points from the year before.) However, the number of mortgagees in default rose the last reporting quarter to 4.70 percent.

The increase comes as no surprise to the group's chief economist, Doug Duncan. "We have been expecting an up-tick in delinquencies due to a number of factors: the seasoning of the loan portfolio, the increased shares of the portfolio that are ARMs and subprime mortgages, as well as the elevated level of energy prices and rising interest rates," he said on the group's website.

Don't pay your taxes. For homeowners who pay their own taxes, (not paid through a mortgage service provider), a tax sale could be in their future if they fail to pay taxes on the property. Though most tax sales are through local governments, both state and federal revenue agencies can confiscate real estate for not paying taxes.

If this happens, it's not as simple as just paying the back taxes and getting your property back. For some, it includes also paying penalties and interest, which many times can bypass the actual amount of the back taxes balance.

If your local taxing jurisdiction is anything like mine here in good old Fairfax County, Virginia, then the confiscation of your home is a last resort -- first they will have tried various other methods of tax collection, such as garnishing wages, confiscated money from your bank, booting and towing your car, then of course, selling your house on the auction block.

File bankruptcy. In the past, filing bankruptcy usually gave the homeowner some protection from losing his home to creditors. With the revamped bankruptcy laws passed last year, creditors may now have the upper hand in bankruptcy situations, according to Herbert Addison, co-author of "How to Save Your Home" and a certified housing counselor. He contends on ezinearticles.com that while the new law allows for 180 days for the consumer to work out payment plans with the creditor, it does not stop the foreclosure process, which could be a shorter period of time than the payment workout plan.

Surety for other debts besides mortgage. Creditors are in business for one thing -- to make money off consumers through interest and fees collected during payback of loans. If the consumer fails to pay off those loans, the creditors can go after assets to satisfy the debts. Your house could be one of those assets.

Failure to pay homeowners dues. If you get into an argument with your homeowners association, withholding the homeowners dues paid each month should not be one of your strategies. HOAs can also auction your house to satisfy past due homeowners HOA fees.
Illegal activity. The American Civil Liberties Union contends that 80 percent of homeowners who have had property forfeited by the federal, state or local government have never been convicted of a crime, rather law enforcement officials only need to prove probable cause that the homeowner either used the property in committing a crime or purchased the house through funds created through illicit behavior.

Published: March 24, 2006

Pricing as Much Art as Science

When shopping for a new home, I've heard many a buyer say, shaking their heads, "What were these people thinking?" Unless the agent has previewed the house and eliminated the "dogs," a buyer can spend a whole day looking at such a wide range of homes that it becomes impossible to see all the inventory in their price range.

Pricing property can be more art than science in today's market. New home builders probably have the easiest time of it -- at least without shocking the buyers -- because everything is new. There are no bare areas in the carpet, fingerprints on the appliances, nicotine stained ceiling tiles in the rec room -- and definitely no cat and dog odors that are promised to be dealt with by installing new carpet after the buyer moves in.

With resale homes, the first weapon to use in the battle to sell the home is to price it correctly. The challenge for sellers is that they want as much as the last sale, however, in today's market that's not as guaranteed as it was a year ago. The seller can still walk away with hundreds of thousands of dollars in gain, but maybe not the absolute highest amount of gain ever in the community.

Thus, pricing is the key. There are only a few ways to price a home for sale and sellers who don't want to putts around on the sale of their home need to adapt to the accepted modes of pricing and get over the fact that their house may not be worth as much as it was 12 months ago.
The first model is probably the most popular -- the comparable. By pulling up only the sales of your particular model, the Realtor can determine a trend price for your home. The challenge in a slowing market is that your particular model may only have three sales in the last year. Such a low number of houses selling does not really create a trend line, especially if the last sale was 6 months previous. Thus, you turn to the second pricing model.

Your home is then dissected to create comparables across a few neighborhoods or even a whole zip code that match your local community. Several aspects of your home will be plugged into the comparable model: style of home (split level, colonial, etc.); number of levels; number of bedrooms and baths; extra rooms; year built; square footage; and more. Then the averages on these parameters are tabulated and you'll have a target price. Keep in mind to remove the highs and lows.

Finally, another way to price your home is to come up with a tax assessment model. This one takes a little bit more homework and data mining. It's tedious, but it can present one of the most accurate pictures of home values in your community. The first step is to pull up all the sales in the community in the last 6 to 12 months. Tabulate the sales price total (let's say it comes up to $10 million) and then tabulate the tax assessment total (our model will use $8 million). Divide the tax assessment into the sales price and you come up with a tax assessment-sales price ratio.

In this case, the community ratio is 1.25. Multiply your tax assessment by the ratio figure, and it will determine your target asking price. For example, if your tax assessment is $250,000, multiply it by 1.25 and you'll arrive at $312,500 as a target asking price. Again, be careful to pull out the anomalies that represent overbuilt properties. The largest, biggest house in the community could affect your price, as well as the pre-foreclosure sale.

You're looking for average prices with average situations for average results.
If you're having to use all three models to arrive at a price, then your real estate professional should weigh in with all three models to determine the price.

The biggest challenge in pricing the home is a seller's greed level. Sorry to be so blunt, but sellers always want more than the last sale, regardless of the market condition. My blunt advice is to "get over it." Waiting around for the "right" buyer is just plain foolishness in the world of real estate. If you're putting your home on the market, don't putts around and waste your time, the buyers' time and the agents' time with an unrealistic asking price.

If your Realtor provides feedback from colleagues that your house is overpriced, move on it. Move from denial into acceptance and price the house right. Remember, the goal here is not to price the property as high as possible, but to sell the house. Good luck.

Published: March 17, 2006

HOAs Create Dreams and Nightmares

A new homeowner wrote that he has not only purchased a new lot in North Carolina to build a future house, but it appears he's also bought into a lawsuit between the new board of directors of the ruling HOA and its developer.

"My first concern is that this was something they started before I became involved and had no control over. Second it seems that this is really a personal battle with a few individuals on the board and the developer. Third, after researching what I could understand, it looks that even if they are successful, the developer could just fix the problem at any time and send us the bill for his troubles," he writes.

"I don't know why they wanted to jump right into litigation with this since it looks like there are a few other avenues to explore," he says, adding, "It's not that I can't pay the additional $400 they are demanding from me, it's that I'm worried this will just blow up in our faces and cost way more than anyone imagined if it's even successful."

Unfortunately, many homeowners find that once they buy a new home, they have also purchased into yet another level of government. While the local jurisdiction enforces state and local ordinances, homeowner associations govern and enforce items as small as the length of grass in the neighborhood, colors of the house and care of the common areas.

Whether we like it or not, homeowner associations (HOA) govern more than 240,000 communities in which 54 million residents live inside 22 million homes, according to the Community Associations Institute, one of the country's largest trade associations for HOAs. The group estimates that these groups collect more than $35 billion in homeowners dues.
For most homeowners, those dues can be as little as $10 per month or as high as several thousands of dollars each year. As you purchase your next home, be sure you don't just sign the bottom line of the HOA document disclosure without looking over items in the documents that will affect your life while living in your new home.

Most homeowner associations operate very similarly like a local jurisdiction. Board members from the community run for office on the board of directors. The biggest problem comes up when a nosey neighbor wins a seat on the board and uses this new-found power to run everyone else's lives.

As I was moving out of a condominium several years ago, many items had not been fully packed and some of the items were being placed into storage. Some were still on the balcony. One of the board members stopped me on the sidewalk to "instruct" me on the rules of what should be allowed on the balcony. Obviously, I was miffed at her air of authoritarianism, and, in fact, it was one of the reasons I was leaving the "compound." I had heard enough stories of this person and several other of her followers even getting access to keys to residents' dwellings to check to see if they were abiding by rules that governed the interior of units.

Friends would advise, "You should get an attorney." It's easier said than done and for most residents, there's just no resolve or money enough to create a legislative civil war to get someone out of your business.

Fortunately, not all other communities I've lived in were operated in such a manner. The board members were truly there to operate the association for the better of the community and to protect home values and conditions.

Nevertheless, if you find that you want to take matters into your own hands, the frustrated homeowner and HOA resident does have a few options when dealing with an HOA gone awry.

First of all, look through your HOA or condo documents for your recourse. It could be as simple as submitting a petition from a majority of the residents to impeaching the whole board.

Second, create a plan of action to bring your grievances to the board. Be ready to volunteer for an existing committee or for creating and serving on a committee or task force to address the problem.

Third, have patience. Your community wasn't build in a weekend and your complaint won't be addressed in one either.

If your grievance involves complaints about dues or special assessments, keep paying these fees while you're a resident or owner. If you quit paying these fees, you could put your case at risk. In addition, if dues payments become too far in arrears, the board could even foreclosure on your house to collect them.

Published: March 10, 2006